Enhancing Access to Capital in Lithuania
Executive Summary
The Lithuanian market faces significant challenges in accessing capital, especially for small and medium-sized projects. While companies are increasingly combining traditional bank loans with bond issuance to meet financing needs, the lack of incentives for issuers and investors, government-backed guarantees and similar risk-reducing instruments limits funding availability. This white paper examines the current state of corporate financing, highlights the benefits of diversified funding channels, and advocates for government interventions to lower risk and enhance access to capital.
Challenges in the Current Financial Ecosystem
- High Borrowing Costs and Limited Access to Bank Financing: Lithuanian companies face some of the highest lending rates in the Eurozone, as Lithuania ranks among the top three countries with the highest borrowing costs together with other Baltic states. For instance, as of November 2024, the average interest rate on loans to non-financial corporations in Lithuania was 5.47%, compared to the Eurozone average of 4.52% 1.
- Underdeveloped Capital Markets: Despite some progress, Lithuania lags behind other EU countries in capital market activity. Between 2016 and 2022, Europe’s equity market capitalization as a share of GDP rose from 48% to 66%². In contrast3, Lithuania’s market capitalization as a share of GDP was only 6.2% in 2023, down from 8.99% in 2016. This modest growth underscores the need for Lithuania to implement measures that can stimulate capital market activity, such as enhancing investor confidence and reducing regulatory barriers.
- Dependence on Bank Loans: Businesses remain heavily reliant on bank financing, which dominates the financial landscape. This reliance creates vulnerabilities, especially during periods of economic downturn when banks may tighten lending conditions.
1. Current Challenges with Existing Government Backed Guarantee Schemes in Bank Financing
While individual guarantees to Lithuanian companies provided by ILTE fully compensate for a lack of collateral, they involve individual decisions by ILTE for each project. This makes them less accessible to small businesses due to high administrative costs, and they tend to be more suitable for larger projects. The process can be slow, as financial institutions may need to re-evaluate projects if ILTE adds conditions.
Recommendations to Improve the Guarantee System:
- The decision should be made by the bank based on pre-defined criteria to ensure speed and reduced administrative costs. The risk of a loan would fall to the bank, and if the bank fails to meet the program’s requirements, the individual guarantee would not be valid.
- Bureaucratic formalities should be reduced. ILTE could accept forms used by financial institutions or clients, rather than requiring its own forms.
- ILTE should avoid adjusting project structures, terms, or guarantee percentages unless absolutely necessary. A less stringent risk assessment could also be considered.
To address the financing challenges of small and risky businesses, a new guarantee scheme with the following features should be considered:
- A risk-sharing mechanism where the financial intermediary’s funds are recovered first, followed by the guarantor’s funds. The intermediary (bank) could contribute a larger portion of funds (e.g., 2-5 times more). This would incentivize banks to be cautious while still allowing them to finance higher-risk ventures.
- Extending the scheme to credit lines and account credits. The scheme could allow financial institutions to join not just at the outset but also during the program’s operation, similar to how EIF models work. This would also be beneficial to include other financial institutions, not only banks.
2. Strengthening Capital Markets: Incentives for Retail Investors or Reduced Regulatory Barriers
- One of the critical actions is supporting IPOs and listings of state-owned enterprises.
When incorporating EU directives into Lithuanian legislation, it is crucial to consider the impact on smaller, developing markets. Additionally, striving for alignment and harmonization of these requirements across the Baltic market is essential. For instance, from a company’s perspective, extending deadlines for SMEs’ financial reports would help alleviate delays, allowing these businesses to meet market demands in a timely manner.
- Develop institutional and retail investor base. Expanding the investor base is crucial. For retail investors, measures such as offering tax incentives through investment savings accounts could drive participation. For example, in order to incentivize long-term investments, Sweden abolished tax on savings held within investment accounts up to 13kEUR and will raise it to 26kEUR next year. Additionally, simplified reporting by banks on investment activity in their accounts could help create a more attractive investment environment.
A balanced regulatory framework would enhance the accessibility of investment services for retail investors by reducing excessive burdens on service providers. The current complex legal environment limits supply, necessitating clearer and more proportionate regulation.
Following geopolitical instability, there has been a pullback in investments, including from institutional investors. One way to attract foreign institutional investors is by listing state-owned enterprises and technology companies. Also, with a minimal number of foreign institutional investors, pension funds play a crucial role. The proposed reform to open pension funds could pose significant challenges for the development of capital markets, so it is recommended to evaluate the reform from a capital markets perspective.
- Strengthening the Corporate Bond Market. ILTE guarantee provides or facilitates the opportunity for bond issuers (either private or public limited companies) to publicly or privately issue a new bond series aimed at financing investments or boosting working capital, guaranteeing up to 50% of the nominal value of each bond issued. Eligible applicants are only SME’s.
However, only 2 companies have benefited from this measure since last summer. The measure is ineffective and it can not boost capital markets, because:
- SMEs rarely issue bonds in general, as there are very few market participants who would agree to buy issues up to 5mEUR; SMEs cannot issue larger issues as they do not have sufficient turnover and financial performance ratios;
- Fixed costs, related to the issuance of guarantees, are a significant part of the costs, related to the issuance of bonds, so it is not attractive to SMEs.
We propose to widen the range of eligible applicants from SMEs to large companies (with a certain share reserved for SMEs), and impose an amount limit, e.g. for issues up to 10mEUR and this will help to achieve the objective of getting the financial markets moving.
The same issues are related to the measure designed to reimburse SMEs for part of the costs incurred in issuing shares and/or bonds, with a view to the listing of these securities on a stock exchange. In order to promote the development of capital markets in Lithuania, ILTE should make this measure available not only to SMEs but also to large companies and to limit the amount of emission (e.g. up to 10mEUR).
Conclusion
To foster economic growth and enhance competitiveness, Lithuania must prioritize creating a supportive environment for diversified financing. Government-backed guarantees and other policy incentives aimed at developing capital markets can play a pivotal role in reducing risk and making capital more accessible to businesses of all sizes. By adopting a proactive approach, Lithuania can unlock its full economic potential and establish itself as a leader in the Baltic region.
1 Data access: Comparing bank interest rates across countries | ECB Data Portal
2 Data access: https://data.ecb.europa.eu/sites/default/files/2025-01/Euro_area_accounts_full_report.pdf